Pre-Budget Report 2009 commentaries - Pensions & Investment
"The commentaries below are written in general terms. Details can also be found in our downloadable Pre-Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."
Restriction of Pension Tax Relief from April 2011
In the 2009 Budget it was announced that as of 2011/2012 tax relief on pension contributions for those with total income of £150,000 or more would be limited. It was, however, also stated that pension benefits derived from an employer’s contributions would not be included when calculating whether the £150,000 limit had been breached.
This consultation paper describes how the Revenue would like to change the rules and there is a consultation period of 12 weeks ending on the 3rd March 2010 during which time interested parties can make their views known on the proposed changes.
The thrust of the proposals is that individuals with income of less than £130,000, including their own pension contributions and charitable donations but excluding employer pension contributions, need not be concerned. However those with income of £130,000 or more are caught if, when any pension contributions funded (or eventually funded) by their employer are added, their ‘gross’ income increases to £150,000 or more. The latter reflects a change to the original proposals.
If this is the case tax relief for pension contributions is tapered where ‘gross’ income falls between £150,000 and £180,000, at which point it is restricted to the basic rate.
Comment
The upshot of these proposed changes is that anyone with total income of less than £130,000 or ‘gross’ income of less than £150,000 will still be entitled to tax relief at their highest marginal rate. Those with ‘gross’ income of more than £180,000 will have tax relief limited to the basic rate of tax, 20%. Individuals with ‘gross’ income between £150,000 and £180,000 will have to apply a special taper rate to determine what their relief is.
Pensions: Restructuring Tax Relief for High-Income Individuals (Anti-Forestalling)
The Budget in April 2009 announced a substantial overhaul effective from 6 April 2011 of the tax relief on pension contributions/benefits accrued for individuals with an income of £150,000 or more. To stop individuals pre-empting the changes by making large pension contributions in 2009/10 and 2010/11 anti-forestalling legislation was introduced in respect of contributions from 22 April 2009 which impacted individuals:
- with relevant income of £150,000 or more in the year in question or preceding two years; and
- who pay or benefit from pension contributions in that year in excess of £20,000 or, in some circumstances, £30,000 unless those contributions were regular (paid at least quarterly) and contracted for by noon on 22 April 2009.
For those individuals caught the tax relief on excess contributions is, effectively, restricted to basic rate tax.
A further change to the above was announced in the PBR. With effect, from 9 December the relevant income threshold is reduced to £130,000 and those affected will be hit by the anti-forestalling changes described above in respect of excess pension contributions made on or after 9 December unless already contracted for.
Comment
Bearing in mind that pensions had been attacked in April it was not widely thought that another change would follow so quickly however, HMRC appear to be correcting what may have been an earlier mistake in that they wanted to target anybody earning £150,000 or more including employer pension contributions. When calculating income for these purposes salary sacrifice arrangements put in place on or after the 9th December will have to be included.
Needless to say these changes have further complicated an individual’s tax affairs and a large number of people will now fall into the special annual allowance charge net and will need advice on how best to plan their pension contributions going forward.
State Pensions
It was announced that whilst State Pensions normally increase at the rate of inflation, recent deflation would mean no increase in the current year but there will be an increase of 2.5% as of April 2010.
Personal Accounts
These pension plans which have been designed to encourage low earners to make pension provision by matching individual contributions with NIC rebates and tax relief were scheduled to go ahead in September 2012. However, they have been delayed a year until 2013 which will result in a tax saving in 2012/2013 of approximately £100m.
Comment
Many commentators believe that these Personal Accounts will not be implemented at all and this delaying tactic, whilst helping to raise revenue, may suggest that the Government thinks likewise.